Inflation Increases Standard Deduction, Tax Brackets, and More

The IRS announced yesterday that it is increasing individual income tax brackets, the standard deduction, and several other key provisions in response to inflation and an effort to prevent “bracket creep” – where workers who receive cost-of-living pay increases are pushed into higher tax brackets even though their standard of living didn’t change. The higher provision thresholds will also theoretically provide relief to some taxpayers who fall into lower tax brackets. 

Here are the changes you can expect beginning January 2023:

Standard deduction

If you do not itemize your deductions, the standard deduction rises roughly 7%: 

• Married couples filing jointly will see an increase to $27,700, up from $25,900 in the current tax year.
• Single taxpayers and married individuals filing separately will see an increase to $13,850 in 2023 from $12,950 currently.
• Heads of households will see an increase to $20,800 from $19,400 this year.

Tax brackets

IRS will also boost tax brackets approximately 7% for each type of tax filer. This will be reflected in paycheck withholding statements beginning January 2023.

Projected 2023 tax bracket income ranges are as follows:

Married, filing jointly:

• 10% – $0 to $22,000
• 12% – $22,000 to $89,450
• 22% – $89,450 to $190,750
• 24% – $190,750 to $364,200
• 32% – $364,200 to $462,500
• 35% – $462,500 to $693,750
• 37% -- $693,750 or more

Unmarried Individuals (other than Surviving Spouses and Heads of Households)

• 10% -- $0 to $11,000
• 12% -- $11,000 to $44,725
• 22% -- $44,725 to $95,375
• 24% -- $95,375 to $182,100
• 32% -- $182,100 to $231,250
• 35% -- $231,250 to $578,125
• 37% -- $578,125 or more

Charts comparing 2022 to 2023 rates can be found here.

Flexible spending accounts

Flexible spending accounts allow individuals to put pre-tax money (limit set by the IRS) in an account that can be used to pay for medical expenses.

The new IRS limit for FSA contributions for 2023 is $3,050, also a roughly 7% increase from the current tax year's threshold of $2,850. 

Increased Gift Exclusion

The amount you gift without paying taxes is increased to $17,000, up from $16,000 in the current year.

Increased Estate Tax Limit

The estates of wealthy Americans will also get a bigger break in 2023 with the IRS exempting up to $12.92 million from the estate tax, up from $12.06 million for people who died in 2022 – again, an increase of roughly 7%.

Alternative Minimum Tax

The projected 2023 AMT exemption is as follows:

• Married Filing Jointly/Surviving Spouses – $126,500
• Unmarried Individuals (other than Surviving Spouses) – $81,300
• Married Filing Separately – $63,250
• Estates and Trusts – $28,400

Earned Income Tax Credit (EITC)

The maximum amount for households who claim the Earned Income Tax Credit will be $7,430 for those who have at least three children, compared with $6,935 in the current tax year.

If you have questions about how these changes will impact your 2023 bottom line, be sure to reach out to our Charlotte based full-service business accounting firm. In addition, we’ll be covering off on this in tomorrow’s webinar, so be sure to tune in.